EBITDA

Glossary / EBITDA · Also called Earnings before interest, taxes, depreciation and amortization

How it works

Interest depends on how a business is financed. Tax depends on its structure and location. Depreciation and amortization spread the cost of assets bought in the past. Taking all four out gives a figure closer to the cash the operations generate in a year.

EBITDA is not a defined measure under US GAAP, IFRS or Canadian standards, so it does not appear on a standard profit and loss. You calculate it from the statement. It also leaves out real costs: equipment wears out and must be replaced, and loans must be repaid, so a healthy EBITDA does not guarantee healthy cash.

When a business is sold, the price is often quoted as a multiple of EBITDA, sometimes adjusted for one-off or owner-related items.

For a small owner-run business, lenders and buyers often look at a close relative: seller's discretionary earnings, which also adds back the owner's own salary and personal perks run through the business. Whichever figure is used, it starts from a clean, accrual-basis profit and loss with depreciation and interest recorded on their own lines, so they can be added back without guesswork.

Worked example: Adding back to net income

A machine shop's profit and loss shows:

Related terms

• Net income
• Depreciation
• Amortization
• Profit and loss statement (P&L)
• Gross margin

Related on this site

• Financial reports in AcboBooks
• Fixed assets and depreciation basics
• Depreciation calculator

Updated October 25, 2026. General information, not tax, legal or accounting advice. Rules and rates change; check with the IRS, the CRA, your state or province, or your accountant.

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